Tax – Tower Financial Group, Inc.

Taxation on the Sale of a Home

admin — Wed, 05 Jul 2017 15:53:40 +0000

For most of us, our home represents our largest asset. Over time, the management of this asset can make a big difference in our overall financial outlook. One of the largest planning opportunities home ownership brings is the favorable tax treatment afforded the sale of a primary residence.

Home Sale as Capital Gain

The gain on the sale of a home is considered a gain on the sale of a capital asset. Any taxable profit you make is subject to a maximum long-term capital gain rate of 15% (5% for gains in the 10% to 15% federal income tax brackets) if you owned the house for more than 12 months. Gain on the sale of a home may only be taxable to the extent it exceeds $250,000 ($500,000 for joint filers) if certain conditions discussed below are met.

To determine your profit (gain), you subtract your basis from the sale price minus all costs and commissions. For instance, if you sell a house for $250,000, and must pay your broker 6% of the sale price — or $15,000 — your sale price for determining capital gain tax is $235,000 ($250,000 minus $15,000).

Say you bought that house 20 years ago, for $35,000. You have since redone the kitchen and bathrooms, put in new windows, added a bedroom, and a new roof. Your basis in the house is $35,000 plus the cost of all of the capital improvements you have made, providing you have paperwork to verify the costs. Let’s assume the total cost of those improvements over the 20 years you owned the home is $40,000. In such a case, your basis would be $75,000. Your capital gain would be $235,000 minus $75,000, or $160,000. If you are in the 28% federal tax bracket or higher, your capital gain tax on your home sale would be $32,000 unless you use the principal residence exclusion.

The Primary Residence Exclusion

A $250,000 exclusion for single filers ($500,000 for joint filers) is now available to all taxpayers. You can claim the exclusion once every 2 years. To be eligible, you must have owned the residence and occupied it as a principal residence for at least 2 of the 5 years before the sale or exchange. If you fail to meet these requirements by reason of a change in place of employment, health, or other unforeseen circumstances you can exclude the fraction of the $250,000 ($500,000 if married filing a joint return) equal to the fraction of 2 years that these requirements are met.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.

Tax Aspects of Working at Home

admin — Wed, 05 Jul 2017 15:53:03 +0000

How much of their home office expenses can be deducted is one of the most misjudged tax questions faced by home workers. The reality of home office expense deductibility is much more complex than the common perception.

When Can Home Office Expenses Be Deducted?

The costs associated with maintaining a home office can be deducted only if strict IRS guidelines are met — generally that the office is used exclusively for business purposes.

The Taxpayer Relief Act of 1997 has eased the requirements for determining if the costs associated with a home office can be deducted. The new law states that a home office qualifies as a “principal place of business” if (1) the taxpayer uses the office to conduct administrative or management activities of a trade or business and (2) there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.

Deductions will continue to be allowed for a home office meeting the above two-part test only if the taxpayer uses the office exclusively on a regular basis as a place of business and, in the case of an employee, only if such exclusive use is for the employer’s convenience.

Home Office Deduction Limits

The home office deduction is limited to the gross income from the activity, reduced by expenses that would otherwise be deductible (such as mortgage interest and taxes) and all other expenses related to the activities that are not house-related. A deduction isn’t allowed to the extent that it creates or increases a net loss from the activity. Any disallowed deduction may be carried over to future years.

Taking the Mystery Out of Capital Gains

admin — Wed, 05 Jul 2017 15:52:33 +0000

Under the recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003, generating long term capital gains or acquiring dividend income could be two of your big opportunities to save on taxes. Be aware that the Act of 2003 created “sunset provisions”, however, meaning that the tax rates on both capital gains and dividends may go up again unless congress acts to extend the rates. The lower rates are currently only legislated through 2010.

Taxation of Long-Term Capital Gains

The maximum tax rate on net capital gain is 15% for most taxpayers, and 5% for taxpayers in the 10% and 15% tax rate brackets for property sold or otherwise disposed of after May 5, 2003 (and installment sale payments received after that date). The reduced rate applies for both the regular tax and the alternative minimum tax.

(Note: The higher rates that apply to unrecaptured section 1250 gain, collectibles gain, and section 1202 gain have not changed.)

Tax Treatment of Capital Losses

If you incur losses from the sale of a capital asset, you can deduct those losses to the extent they equal capital gains from the sale of other assets. If your losses exceed your gains, you can only deduct up to $3,000 ($1,500 if you are married and filing separately) of capital losses in a tax year against other income on Form 1040. You can carry losses forward and continue to deduct $3,000 ($1,500 if filing separately) annually against other income until your losses are used up.

Gift Tax Fundamentals

admin — Wed, 05 Jul 2017 15:50:11 +0000

The federal government imposes a substantial tax on gifts of money or property above certain levels. Without such a tax someone with a sizable estate could give away a large portion of their property before death and escape death taxes altogether. For this reason, the gift tax acts more or less as a backstop to the estate tax. And yet, few people actually pay a gift tax during their lifetime. A gift program can substantially reduce overall transfer taxes; however, it requires good planning and a commitment to proceed with the gifts.

Advantages of Gift Giving

You may have many reasons for making gifts — for some gift giving has personal motives, or others, tax planning motives. Most often you will want your gift giving program to accomplish both personal and tax motives. A few reasons for considering a gift giving plan include:

Assist someone in immediate financial need
Provide financial security for the recipient
Give the recipient experience in handling money
See the recipient enjoy the property
Take advantage of annual exclusion
Paying gift tax to reduce overall taxes
Giving tax advantages gifts to minors

Gift Tax Annual Exclusion

Probably the easiest way to reduce the size of your taxable estate is to make regular use of the gift tax annual exclusion. You may give up to $13,000 each year to as many persons as you want without incurring any gift tax. If your spouse joins in making the gift (by consenting on a gift tax return), you may (as a couple) give $26,000 to each person annually without any gift tax liability.

Unlimited Gift Tax Exclusion

In addition to the $13,000 exclusion, there is an unlimited gift tax exclusion available to pay someone’s medical or educational expenses. The beneficiary does not have to be your dependent or even related to you, although payment of a grandchild’s expenses is perhaps the most common use of the exclusion. You must make the payment directly to the institution providing the service — the beneficiary himself or herself must not receive the payment.

Gift Programs and Your Estate

Use of the gift tax exclusion in a single year may not affect your estate tax situation significantly, but you can reduce your taxable estate substantially through a planned annual program of $13,000 (or $26,000 if you are married) gifts. All gifts within the exclusion limits are protected from federal estate taxes.

In addition to reducing the size of your estate, another major tax advantage of making a gift is the removal of future appreciation in the property’s value from your estate. Suppose that you give stocks worth $50,000 to your children now. If you die in 10 years and the stock is worth $130,000, your estate will escape tax on the $80,000 appreciation.